March 21, 2008
Retail Bankruptcies Could Be Worse Than 1991
By Tom Ryan
While still healthy overall, mall centers are being roiled by massive store closings among a variety of formats. Unless the economy dramatically improves, retail bankruptcies this year could reach the highest level since the 1991 recession, Dan Ansell who heads up real estate for the law firm Greenberg Traurig LLP, told the Associated Press.
Wilsons Leather, KB Toys, Ann Taylor, American Eagle, Talbots, Pacific Sunwear and Zale have already closed hundreds of stores this year. Sharper Image and Lilian Vernon have filed for bankruptcy, and analysts are waiting to see if store closing announcements are coming from Circuit City and Sears Holdings.
According to data from NAI Global, a commercial real estate services firm, average retail vacancy rates have climbed to between 7 percent and 8 percent from 5 percent over the last six months.
David Solomon, president and CEO of ReStore, NAI Global’s retail division, told the AP that vacancy rates could hit 10 percent by the end of the year. Suzanne Mulvee, senior economist at Property & Portfolio Research, predicts vacancies could rise as high as 12.5 percent this year. Her figure includes retail spaces where tenants have defaulted on their rents.
Part of the problem, according to Ms. Mulvee, is that another 130 million square feet of retail space will become available this year, she predicts, on top of last year’s 143 million. That is well above the average 100 million square feet added per year earlier in the decade.
Still, Mr. Solomon doesn’t think the situation will be as dire as in 1991, when the savings and loan crisis hurt the entire country. At the time, it was the department stores that felt the major shakeup as leveraged buyouts and fierce competition led to the demise of names like Carter Hawley Hale Stores and Woodward & Lothrop. Major bankruptcies around that time included Allied Stores, Federated Department Stores, Macy’s, Ames, Best Products, McCrory’s, Hills Department Stores, Zale’s and Hechingers. Experts also said merchants this time are weathering downturns better because of new systems to control inventory and costs.
Mall operators claim their top anchors — the department stores and other big chains — are in sound financial shape. Bill Taubman, chief operating officer of Taubman Centers, predicts more store closings and bankruptcies than last year, but doesn’t think they will reach historic highs.
Discussion Questions: How would you assess the current retail climate compared to 1991? Are retailers more prepared to handle the current downturn than in 1991? Why or why not?
BrainTrust
Recent Discussions
Discussion Questions
Poll
Since there’s been much published about how “over-stored” the U.S. is, I do believe the number’s going to be much larger. Might be better to look at a percentage to get some relevance when all is said and done though.
Also, I don’t know about my fellow panelists, but from all our contacts in the retail and restaurant world, this sure feels like it’s going to be a lot worse than ’91. I’m not hearing any good news at all at this point–weather, spending cessation, low traffic, high prices, un-caring politicians (“so?”)–what’s positive about this year?
Discussions on the positive side align more with the thought of “what are we going to do to innovate now so that when we come out of this, we’ll be a better business?” That is a great thought and something to act on, but other than that, it’s time to look very seriously at cap-ex out through ’09.
My concern is that since 1991 we have had many strong economic years that resulted in the up springing of hundreds of more malls and shopping districts than what existed prior. This means there are a lot more properties now to be blighted when retail shops go out of business and not replaced by new tenants. In that sense, it will look worse in 2008, and beyond, and that in itself could have a psychological effect on the economy.
However, the market will determine the end result and of course, down cycles are usually followed by upturns, so what will be will be.
There are two big differences between 2008 and 1991. First off is the internet and the ability for consumers to buy what they want without visiting a store. Second, we now have an educated consumer.
In 1991, the consumer had to go to the store to find out what is available, etc. Today the consumer has social networking sites, web news sites and the like which allow the consumer to know more than the retail store. All of this means the footprint of a typical store does not need to be as large as it used to be; this of course is bad news for the REITs.
In total, this downturn is good news for the consumer as it will force the retail industry to be more closely aligned with how the consumer receives their information.
It looks as if the the inevitable cycle of thinning out of marginal retailers has begun and will worsen before it gets better. We go through economic periods where just about anybody can make it for awhile and then when times get tougher we see the fallout. This can be hard to watch and it is easy to have sympathy for your favorites.
The saying “Even a blind hog finds an acorn once in awhile” might apply here. It is hard though, to feel too much sympathy for businesses that can’t even accomplish the basics right. Clean stores and friendly, helpful employees shouldn’t be too much to expect.
I don’t believe there is any such thing as a bad economy. The stock market is up more than it was just a couple of years ago, homes are a bargain, interest rates are down, and Wal-Mart is still packed on weekends. While there is no such thing as a bad economy there are poor retailers who will use the economy as an excuse for failure. Perhaps we need some cyclical changes now and then to weed out poorly run retailers.
Retailers have more control then they realize in coping through tough economic times. Providing excellent service and aggressive pricing is the antidote for the poisoned economy. We tend to forget those key elements and instead, focus on cutting labor and closing stores which affects growth in any economic condition. Serve your customer well and they will return the favour.
As we head into difficult times, stores need to look for areas of significant growth and profitability. That will help them weather the storms of recession, consumer nervousness, etc.
One of the significant areas of growth for retailers now is the internet. Media Week published an article a few days ago that said that while brick and mortar sales are forecasted to be down or flat for 2008, e-commerce sales are forecasted to increase by 23% in the USA. They also refer to the e-commerce business as “virtually recession-proof.”
Those are strong claims, and perhaps too aggressive. But undeniably, the internet is an important part of the retailer’s business. We work with retailers in both brick and more (helping them with inventory planning, open to buy, etc.) and e-commerce (website design, internet marketing, SEO, Pay Per Click, etc.) and I can tell you that we are seeing much more growth online than in the store. Many customers tell me that they would rather close their stores and do everything online. That could contribute to the available space out there.
While the economy is certainly difficult today, there are significant differences in the early years of the 1990s. It is likely we will continue to see store closings in large numbers but the actual number of retail companies going out of business will be much smaller than during the early 1990s. During those years a large number of retailers that failed were single-location stores along with small and regional chains. The over-storing situation today has been fed by large national chains opening new units at a record pace. With an unstable economy many of these retailers will be forced to close stores reevaluate their growth plans. They may even be forced to actually find ways to improve the performance of their existing stores to grow their businesses.
It is a troubling time for retailers. Those that survive, as always, are the retailers who operate their businesses prudently and responsibly. They will be retailers who keep costs in line regardless of the economy; give customers a compelling reason to shop in their stores; and treat every customer like the valuable asset they are!
The longest-lived retailers are the ones who own their real estate. If higher vacancy rates lead to bargain real estate prices, better-capitalized forward-thinking retailers can either buy some locations at a discount or extend their leases at gentle increases. When the internet crashed in 2000 and 2001, the warehouse space surplus was astounding. So retail downtrends don’t just create vacancies in malls and strip centers.
And if prescription drug price reform ever takes hold in the USA, look for a sharp decline in chain drugstore locations. Federal and state prescription drug subsidies, along with the insurance company drug plans, fueled a fantastic mushroom growth in new drugstores.
More Discussions
Has Same-Day Delivery Become an Expectation Across Retail?
Are expectations around retail delivery speed in flux?OpenAI Names the Infrastructure Standard for Agentic Commerce
Will OpenAI or Google (or another entity) set the gold standard for agentic commerce?Is Five Below Poised For Even Greater Growth?
Five Below is hitting serious growth numbers. Can this trend continue?
Since there’s been much published about how “over-stored” the U.S. is, I do believe the number’s going to be much larger. Might be better to look at a percentage to get some relevance when all is said and done though.
Also, I don’t know about my fellow panelists, but from all our contacts in the retail and restaurant world, this sure feels like it’s going to be a lot worse than ’91. I’m not hearing any good news at all at this point–weather, spending cessation, low traffic, high prices, un-caring politicians (“so?”)–what’s positive about this year?
Discussions on the positive side align more with the thought of “what are we going to do to innovate now so that when we come out of this, we’ll be a better business?” That is a great thought and something to act on, but other than that, it’s time to look very seriously at cap-ex out through ’09.
My concern is that since 1991 we have had many strong economic years that resulted in the up springing of hundreds of more malls and shopping districts than what existed prior. This means there are a lot more properties now to be blighted when retail shops go out of business and not replaced by new tenants. In that sense, it will look worse in 2008, and beyond, and that in itself could have a psychological effect on the economy.
However, the market will determine the end result and of course, down cycles are usually followed by upturns, so what will be will be.
There are two big differences between 2008 and 1991. First off is the internet and the ability for consumers to buy what they want without visiting a store. Second, we now have an educated consumer.
In 1991, the consumer had to go to the store to find out what is available, etc. Today the consumer has social networking sites, web news sites and the like which allow the consumer to know more than the retail store. All of this means the footprint of a typical store does not need to be as large as it used to be; this of course is bad news for the REITs.
In total, this downturn is good news for the consumer as it will force the retail industry to be more closely aligned with how the consumer receives their information.
It looks as if the the inevitable cycle of thinning out of marginal retailers has begun and will worsen before it gets better. We go through economic periods where just about anybody can make it for awhile and then when times get tougher we see the fallout. This can be hard to watch and it is easy to have sympathy for your favorites.
The saying “Even a blind hog finds an acorn once in awhile” might apply here. It is hard though, to feel too much sympathy for businesses that can’t even accomplish the basics right. Clean stores and friendly, helpful employees shouldn’t be too much to expect.
I don’t believe there is any such thing as a bad economy. The stock market is up more than it was just a couple of years ago, homes are a bargain, interest rates are down, and Wal-Mart is still packed on weekends. While there is no such thing as a bad economy there are poor retailers who will use the economy as an excuse for failure. Perhaps we need some cyclical changes now and then to weed out poorly run retailers.
Retailers have more control then they realize in coping through tough economic times. Providing excellent service and aggressive pricing is the antidote for the poisoned economy. We tend to forget those key elements and instead, focus on cutting labor and closing stores which affects growth in any economic condition. Serve your customer well and they will return the favour.
As we head into difficult times, stores need to look for areas of significant growth and profitability. That will help them weather the storms of recession, consumer nervousness, etc.
One of the significant areas of growth for retailers now is the internet. Media Week published an article a few days ago that said that while brick and mortar sales are forecasted to be down or flat for 2008, e-commerce sales are forecasted to increase by 23% in the USA. They also refer to the e-commerce business as “virtually recession-proof.”
Those are strong claims, and perhaps too aggressive. But undeniably, the internet is an important part of the retailer’s business. We work with retailers in both brick and more (helping them with inventory planning, open to buy, etc.) and e-commerce (website design, internet marketing, SEO, Pay Per Click, etc.) and I can tell you that we are seeing much more growth online than in the store. Many customers tell me that they would rather close their stores and do everything online. That could contribute to the available space out there.
While the economy is certainly difficult today, there are significant differences in the early years of the 1990s. It is likely we will continue to see store closings in large numbers but the actual number of retail companies going out of business will be much smaller than during the early 1990s. During those years a large number of retailers that failed were single-location stores along with small and regional chains. The over-storing situation today has been fed by large national chains opening new units at a record pace. With an unstable economy many of these retailers will be forced to close stores reevaluate their growth plans. They may even be forced to actually find ways to improve the performance of their existing stores to grow their businesses.
It is a troubling time for retailers. Those that survive, as always, are the retailers who operate their businesses prudently and responsibly. They will be retailers who keep costs in line regardless of the economy; give customers a compelling reason to shop in their stores; and treat every customer like the valuable asset they are!
The longest-lived retailers are the ones who own their real estate. If higher vacancy rates lead to bargain real estate prices, better-capitalized forward-thinking retailers can either buy some locations at a discount or extend their leases at gentle increases. When the internet crashed in 2000 and 2001, the warehouse space surplus was astounding. So retail downtrends don’t just create vacancies in malls and strip centers.
And if prescription drug price reform ever takes hold in the USA, look for a sharp decline in chain drugstore locations. Federal and state prescription drug subsidies, along with the insurance company drug plans, fueled a fantastic mushroom growth in new drugstores.